Business is brisk for Alberta mortgage broker Adil Mawji. However, it’s not because Albertans are busy buying homes — sales are actually declining in Canada’s one-time boom province. Rather, it’s because Albertans are fearful for their jobs as the oil and gas market gets routed. They are looking to take risk off the table and lock in mortgage rates at historically low levels. “People are trying to get their mortgage secured right now and take advantage of the lower rates,” says Mawji, a senior mortgage broker at Invis Inc. and president of the Alberta Mortgage Brokers Association. “A lot of people in the oil and gas sector are not sure if their jobs are going to be around or if they are going to be making as much money. We’re trying to coach them to be prepared.”

More than just the resale market is being impacted by oil’s slide. Brian Johnston, chief operating officer of Mattamy Homes, Canada’s largest new homebuilder, said his firm, which has communities in both Ontario and Alberta, quickly reacted to oil’s decline and “made some market price adjustments and dabbled with incentives. We don’t believe this is a short-term phenomenon.”

The bloom is definitely off the Alberta rose, as oil prices drop to levels not seen in 11 years. BMO economist Robert Kavcic says Alberta’s GDP is down about one per cent this year, and by mid-year, the province had shed between 20,000 and 30,000 jobs. “Alberta confidence is shaken for sure.” The losses are clearly showing up in Alberta home sales numbers. As of July, residential home resales were down 14.7 per cent from last year, according to the Canadian Real Estate Association, but still trending above the 10-year average. Prices were also holding, with the average home selling for $394,977, about the same as last year, while prices in other major markets continue to rise. How much longer prices hold is anyone¹s guess, but CREA expects a 2.8 per cent decline in Alberta prices this year. “We¹re starting to see a trend toward values dropping,” Mawji says.

The mantra when it comes to home buying has long been location, location, location, but the health of any real estate market hinges on three pillars: the economy, consumer confidence and mortgage rates. Right now, two of those pillars, consumer confidence and the economy, which usually go hand in hand, are teetering in Alberta and the third is expected to rise nationally at some point.

Some of the more bearish economists and prognosticators think Alberta’s malaise may spread to other parts of the country, particularly the hot markets in Vancouver and Toronto, which still show few signs of letting up. But David Madani, an economist at Capital Economics, thinks those two markets will correct by 30 per cent. Of course, four years ago, he said there would be a 25 per cent correction in Canadian house prices, which has yet to pan out. The august C.D. Howe Institute, however, believes Canada needs to set up a special $9-billion fund to prepare for a housing crash like the U.S. had last decade. Such talk seems alarmist given that Alberta’s economy is just about as bad as it could be and the housing market, although moribund, isn’t nearly as bad as you might expect. Nevertheless, there may be some things the rest of Canada can learn from Alberta.

It’s all about economy

“Mostly, the real estate market is affected by employment,” says real estate agent Corinne Lyall, head of the Calgary Real Estate Board. “The last two years have seen very little inventory and huge migration (into the province).” That has buoyed the real estate markets. But with the recent job losses, she says “consumer confidence hasn’t held. We’re back to 2011 and 2012 levels, when it comes to home sales.”

Alberta is not alone. The declining oil and commodity prices are taking their toll on those provinces that rely most heavily on energy production. Canada Mortgage and Housing Corp. forecasts 2015 residential resales will decline 19 per cent in Alberta, 9.8 per cent in Saskatchewan and five per cent in Newfoundland. However, experts say that pain isn’t likely to be felt in other key provinces, such as Ontario and Quebec, whose manufacturing sectors, which make up a significant portion of their economy, stand to gain from lower oil prices. As well, provinces like Manitoba and B.C. are also benefiting from their more diversified economies. CMHC predicts the resale market in the latter two provinces will rise this year, led by B.C., which will experience a 6.5 per cent increase. Atlantic Canada, on the other hand, remains tepid, with sales expected to decline in 2015.

However, CMHC also warned Canadians about overheated markets in some cities. Regina, Winnipeg and Toronto were cited as “high risk,” due to a combination of overheating, overbuilding, accelerating house prices and overvaluations. Vancouver, Calgary, Edmonton, Victoria, Hamilton, Ottawa and Saskatoon were all listed as low risk, while Montreal and Quebec City were cited as moderate risk. Nationally, CMHC’s chief economist Bob Dugan says Canada was at a low risk, although CMHC “continues to detect a modest risk of overvaluation.” But, he adds, “imbalances in local housing markets could be resolved with further moderation in house prices or improving economic conditions.”

Uncertain conditions

It’s that economic uncertainty that has many wondering whether or not the rest of Canada will start to feel the housing pinch that oil-producing provinces are experiencing. BMO’s Kavcic says that while there is a lot of recession talk, “it depends on where in the country you are and what sector you’re in.” For example, he notes that Alberta’s energy sector is certainly hurting, but “we haven’t really seen much of a spillover to other sectors yet” — though he thinks it’s only a matter of time before construction there slows. In terms of other provinces, the economic picture is much rosier. “The rest of the country is doing well,” he says.

Among the factors working in the housing market’s favour is the national unemployment rate, which is forecast to drop to 6.8 per cent in 2015 from 6.9 per cent in 2014 and dip even more to 6.6 per cent in 2016. Moreover, gross domestic product on a provincial basis remains positive. Alberta will dip to 0.3 per cent in 2015, but nationally it’s holding around 2 per cent, in line with 2016 estimates. B.C. and Ontario are expected to lead the pack in 2016 with growth of 2.8 per cent and 2.4 per cent, respectively, which should provide support for housing markets in two of Canada’s biggest cities, Toronto and Vancouver.

Kavcic says external factors, such as the rising U.S. economy, will also be beneficial. In B.C., for example, he says the forestry sector is bouncing back, thanks in part to the increasing demand from the U.S., notably its rebounding housing sector. Low oil prices aside, experts say the U.S. recovery bodes well for much of Canada, particularly Ontario and Quebec. Cheaper gas prices, plus a stronger U.S. dollar, which means a cheaper loonie, favour Canadian exporters. Ontario exports almost 80 per cent of its goods, or about $130 billion, to the U.S., while Quebec sends about 68 per cent of its exports south. It’s safe to say the job picture in Central Canada looks steady, assuming the U.S. continues to do well.

Calgary real estate broker Rick Campos, owner of RE/Max First, says the stronger U.S. dollar and rising U.S. home prices also mean more Canadians are going to keep more of their money at home. “The secondary home market in Canada is going to strengthen,” he predicts, and that will make properties in places such as B.C.’s Okanagan region and Ontario cottage country even more attractive. Another factor buttressing the bull market in housing, Campos says, is a July CMHC rule change that allows homeowners to include 100 per cent of rent — up from 50 per cent — from a secondary unit in their home when seeking an insured mortgage. “That tells me banks have confidence in the marketplace for them to allow that.”

Migration is another factor experts say is important in propping up real estate prices, particularly in Toronto and Vancouver. Mattamy’s Johnston says immigration plays a key role in the Ontario market and is “constantly underestimated by observers.” Unlike Alberta, he notes Ontario suffers a shortage of supply when it comes to homes, driven in part by immigration. “Toronto is a magnet and an international city,” he says, making it attractive for those immigrating to Canada. In a typical year, about 250,000 people immigrate to Canada with about half settling in Ontario, followed by Quebec and B.C. Most will move to a metropolitan area. As well, total net migration within the country also plays a factor in house prices, and on that front, Ontario, Alberta, B.C. and Quebec stand to gain the most.

Housing market risks

That’s not to say the housing market is risk free — far from it. In its June Financial System Review, the Bank of Canada cites four key risks to the Canadian financial system, any one of which could kick out the struts supporting Canada’s home prices.

The first is household financial stress. Household debt is rising faster than Toronto condo prices, growing at a five per cent clip to now sit at historically high levels. The central bank notes that “because of the importance of housing to the wealth of many Canadians, especially the middle class, their net worth remains vulnerable to a decline in house prices.” Alberta is particularly susceptible to what the bank calls “income shocks.” It warns that any broad-based decline in income that impacts the ability of Canadians to service their debt will lead to a “widespread correction in home prices.” The probability of that happening remains low, but the risk has marginally increased because of sinking oil prices.

On that front, Edmonton real estate agent Greg Steele, past president of the Realtors Association of Edmonton, notes that legal action is “starting to creep into the market.” When homeowners fall two months behind in their mortgage payments, he says, the banks will send letters demanding the money owed be paid. Such letters, a precursor to foreclosure, are on the rise. “It’s something we haven’t seen in a few years,” he says, though he adds that judicial sales “are not going to be a huge portion of the market.” Affordability also remains an issue in parts of the country. Annual price gains in some markets have outstripped income growth, notes Kavcic.

Tyler Anderson/National Post

The second key risk facing Canada is a sharp increase in long-term interest rates, which the bank rates as a “moderate risk,” but a “low probability.” Nonetheless, homeowners need to start preparing for the likelihood of higher interest rates. Today, Mawji says, a five-year mortgage can be had for as little as 2.59 per cent. However, that is exceedingly low by historical standards.

Since 1951, the five-year mortgage rate in Canada has averaged 8.5 per cent, while the median during that time is 7.46 per cent, according to Bank of Canada statistics. The five-year rate hit a high of 21.46 per cent in September 1981, and sunk to its lowest at 3.71 per cent in July of this year. To put that in perspective, a $100,000 mortgage in September 1981 cost about $1,788 a month in interest payments just to carry, never mind paying principal. Contrast that to the $308 in monthly interest it takes today to carry a $100,000 mortgage.

A return to the median rate of 7.46 per cent would be a shock to most households and a generation or two of mortgage holders, since the last time Canada saw mortgages in the 7 per cent range was May 2002, more than 13 years ago. Such a rate would add hundreds of dollars a month to the cost of a mortgage. “If you were to get a two per cent increase in mortgage rates tomorrow morning, you would have a housing crisis,” BMO’s Kavcic says. However, he adds, “I don¹t think we will get that big of an increase in mortgage rates and certainly not over that short of a time period.”

The global factor

Of course, Canada is also subject to the ups and downs of the global economy. One of the risks remains the possibility of a significant financial stress event from Europe, which would have a “moderately severe” impact on Canada. Greece is still muddling through its refinancing efforts, something highlighted by Prime Minister Alexis Tsipras resigning in August, but other countries such as Portugal, Italy and Spain remain a problem. The Bank of Canada has decreased its rating of such an event to moderate from elevated, but said euro-area stress would mainly affect Canada through financial channels and an increase in volatility, which could cause a flight to liquidity. That could lead to tighter credit conditions on already stressed out Canadian households.

But the biggest wild card out there is China. The Bank of Canada cites China and emerging-market economies as the fourth risk Canadian homeowners should be watching. “A sharp slowdown in China would have global ramifications through trade, financial, commodity price and confidence effects, which would reduce the income and wealth of Canadians,” the bank notes.

If the Chinese economy contracts and goes into recession, we’ll be affected

China is a major actor in Canada’s economy. Its high growth rate means it consumes a high rate of commodities, helping set the price of commodities. In terms of real estate, mainland Chinese immigrating to Canada are believed to be driving much of the housing gains in Vancouver, particularly in the luxury end of the market. Jonathan Cooper, vice-president of operations at Macdonald Realty in Vancouver, examined his firm’s sales in 2014 and found that of the homes that sold for more than $3 million, 70 per cent of the buyers came from mainland China. For homes priced between $1 and $3 million, it was 21 per cent. “If the Chinese economy contracts and goes into recession, we’ll be affected,” he says.

The China story is still playing out as its economy has hit a rocky patch over the past few months. Loan defaults are rising, there’s been a slowdown in the housing market, the government imposed unprecedented restrictions on share sales of public companies after its stock market plummeted, and the country devalued its currency, making those high-priced Vancouver homes even more expensive. The jury is out on whether the recent currency devaluation will keep the country’s growth rate on track at seven per cent.

In the meantime, mortgage broker Mawji urges caution for the rest of Canada, based on the Alberta experience. Remember, he says, “if the tough times hit, the first 20 per cent of value drop is the homeowners’ own equity in their property. If they are inclined to sell, they should probably sell now.”